Monday, February 01, 2010

Manufacturing in January-State of the Economy...

The positive portent of the first day of the trading year did not hold through for the DOW as the index dropped nearly 3.5 percentage points in January. Let us just assume that Mark Hulbert is correct that it means little. Returning to one of my favorite subjects, Fox Business provides a good analysis of the January 2010 Manufacturing ISM Report On Business® at the article entitled Manufacturing Posted Another Strong Month in January. Let me quote some of the more important positive portions.
The Institute for Supply Management said Monday that its closely watched PMI rose to 58.4 from 54.9 in December, hitting its highest point since the 58.5 touched in August 2004.

What’ more, the latest report was full of encouraging news for the sector; the all-important new orders index rose to 65.9 from 64.8 the month before, employment rose to 53.3 from 50.2; and production jumped to 66.2 from 59.7. Backlogs also jumped by a substantial six percentage points, to 56.

“This month's report provides significant assurance that the manufacturing sector is in recovery,” said. Norbert Ore, chair of the ISM’s Manufacturing Business Survey Committee. “Both the new orders and production indexes are above 60%, indicating strong current and future performance for manufacturing. This month, 13 of 18 industries reported growth, up from nine industries last month, and this is a good indication that the impact of the recovery is expanding."

Most definitely, very positive news and better than I had expected. Some points worth noting are:
* It is worth pointing out that in addition to the employment index increasing significantly to the positive side it also reversed having more more respondents stating that they are losing jobs.
* In last month's report I noted that 17% were gaining employment and 18% were losing employment and January's report was 15% higher and 12% lower and the breakdown by industries were 7 up and 6 down.
* Last month in my blog post, I noted that import index was expanding at a faster rate than exports, but that trend has reversed and the export index rose to 58.5 which was a rise of 4 points and imports index rose by a lesser amount of 1.5 point to 56.5 points.

FoxBusiness states the rise in the inflation index as "one sobering sign" and that seems to be an understatement. Not only did the price index rise almost 14% (61.5 to 70), it was over the last months increase of around 8.5% which was of concern to me at the time. The ISM report also noted that only 4% of respondents stated price declines and 44% said prices increased. That is clearly a dramatic shift in respondents price changes especially since just in November the ratio of respondents that faced decreasing prices was one for every 2 facing increases and now the ratio is 1 to 11. The ISM report also quoted a respondent stating, "Commodity prices are moving up again." (Printing & Related Support Activities). It looks like the Fed may have to consider these data points also and an obvious reason for some dissension in the ranks of the FOMC members.

MarketWatch had a forecast of 56 and the Econoday Report stated the consensus was 55 and the range was 54 to 57. Econoday also notes an important point about producer prices and whether "feed through" of inflation can and will happen.
However, indications on the output side, not available in this report, are pointing to no pricing power yet for finished goods. Today's report is very strong and points to a V-recovery for the manufacturing sector, a sector all through the second half of last year that was at the center of economic recovery.

Non-manufacturing Report.
Both MarketWatch and Econoday noted that the consensus for the Non-Manufacturing ISM Report On Business® at 51 and the range that Econoday provided was 49 to 52 with the report filing it at 50.5 percentage points. Naturally I was surprised to learn that Services index returns to growth ISM's nonmanufacturing gauge rises to 50.5% as my last blog post stated the nonmaufacturing was 50.1 of the last report and also signifying an expansion. It seems that revisions are not publicized as well as should be and even the Econoday link above notes the 50.1 of the prior report.

But even with that change, it still is not much to shout about.
* New orders were up signaling future growth possibilities.
* Employment is still anemic at well below 50 at 44.6 percentage points.
* Although the index is positive there are only 4 industries in growth and 11 in contraction which makes for uneven growth and not as broad based as desired.
* While not as high of index points as the price index for manufacturing, the price index for non-manufacturing is still high at 61.2 which was a rise of 1.6 from the previous report.
* Respondents were also quoted as saying that this was an issue going forward as in these responses:
"Commodity prices are starting to rise. We will be trying to mitigate inflationary price trends through longer contracts and value engineering." (Accommodation & Food Services)

"The recent unexpected rise in fuel prices, with no apparent justification, is cause for concern." (Public Administration)

What does this all mean?
Inflation while still not resulting in rising costs for consumers is being felt on main street. At least some inflation is better than deflation over the long term as witnessed by the lost decades of the Japanese economy. Manufacturing is looking good but non-manufacturing is still anemic even with massive government stimulus as well as the Fed providing more liquidity to the credit markets than nearly any time in history. I still have some doubts about the housing markets and hope to cover those issues in the next blog post.

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